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Unformatted text preview: CHAPTER 20 COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS CLASS DISCUSSION QUESTIONS 1. Total variable costs vary in direct propor- tion to changes in the level of activity. Unit variable costs remain the same with changes in the level of activity. 2. a. Variable costs b. Variable costs c. Variable costs 3. a. Total fixed costs remain the same as the level of activity increases. b. Unit fixed costs decrease as the level of activity increases. 4. a. Fixed costs b. Fixed costs c. Fixed costs 5. Mixed costs are separated into their fixed and variable cost components. 6. (a) 7. (b) 8. (a) 9. The total variable cost (variable cost per unit times total units produced) at either the highest or lowest level of production is de- termined, and this amount is subtracted from the total cost at that level to determine the total fixed cost. 10. a. No impact on the contribution margin. b. Income from operations would decline. 11. A high contribution margin ratio, coupled with idle capacity, indicates a potential for in- creased income from operations if additional sales can be made. A large percentage of each additional sales dollar would be avail- able, after providing for variable costs, to cover promotion efforts and to increase in- come from operations. Thus, a substantial sales promotion campaign should be con- sidered in order to expand sales to maxim- um capacity and to take advantage of the low ratio of variable costs to sales. 12. Decreases in unit variable costs, such as a decrease in the unit cost of direct materials, will decrease the break-even point. 13. Increases in total fixed costs will increase the break-even point. 14. Simmons Company had lower fixed costs and a higher percentage of variable costs to sales than did Pate Company. Such a situation resulted in a lower break-even point for Simmons Company. 15. The individual products are treated as com- ponents of one overall enterprise product. These components are weighted by the sales mix percentages. 16. Operating leverage measures the relative mix of a businesss variable costs and fixed costs. It is computed as follows: Operating leverage = operations from Income margin on Contributi 113 113 EXERCISES Ex. 201 1. Variable 2. Fixed 3. Variable 4. Mixed 5. Fixed 6. Variable 7. Variable 8. Variable 9. Variable 10. Fixed 11. Mixed 12. Variable 13. Variable 14. Fixed 15. Variable Ex. 202 a. Cost Graph Two b. Cost Graph Three c. Cost Graph Four d. Cost Graph Three e. Cost Graph One Ex. 203 1. a 2. d 3. e 4. c 5. c 6. b 114 114 Ex. 204 1. e 2. a 3. g Ex. 205 a. Variable b. Fixed* c. Fixed d. Variable e. Variable f. Variable g. Fixed h. Variable i. Variable j. Fixed k. Variable l. Fixed *The developer salaries are fixed because they are more variable to the number of titles or releases, rather than the number of units sold. For example, a title could sell one copy or a million copies, and the salaries of the developers would not be affected....
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